The author is a KB Securities analyst. He can be contacted at [email protected] – Ed.
Robust 2Q21 PO positive for equities but unfavorable market conditions in 2H21 worrying
– The OP for 2Q21 exceeded the market consensus with sales of tire units exceeding estimates. While robust earnings should support the stock, market conditions could deteriorate in 2H21, so investors should be cautious.
2Q21 OP misses our estimate on higher than expected raw material costs
– The 2Q21 PO reached KRW 187.2 billion (+ 167.1% year-on-year), or KRW 10.5 billion (6.0%) above the market consensus but 20.5 billion of KRW (9.9%) below our estimate.
– We attribute the deficiency to the following: (1) higher than expected raw material costs (unit sales and ASPs exceeding estimates), (2) fixed costs meeting expectations and (3) lower US anti-dumping tariffs provided that. As a result, variable costs appear to have been higher than expected (largely due to raw material costs).
– Unit tire sales jumped 29.9% year-on-year (8.6% above our estimate), increasing revenue by KRW 403.8 billion (2Q20 tire revenue of 1.35 tn KRW x unit tire sales growth of 29.9%). Even taking into account the increase in variable costs (+ KRW272.2 billion = 2Q20 raw material cost of KRW545.4 billion x 29.9% + 2Q20 variable cost of KRW365.0 billion x 29.9%), we let’s calculate OP increasing KRW131.5bn YoY, or KRW42 0.7 billion more than our estimate.
– We estimate that 2Q21’s KRW-based tires’ ASP has increased 2.1% yoy, boosting the PO by KRW 86.4 billion yoy, or KRW 45.5 billion more than our estimate.
– Depreciation and amortization appear to be in line with our estimate (increase of KRW 1.1 billion), and no significant factor increased labor costs. In addition, the US anti-dumping tariffs were KRW 9.0 billion lower than our estimate (KRW 27.1 billion).
– Overall, we think OP missed our estimate due to higher than expected variable costs. Raw material costs in 2Q21 jumped 17.2% year-on-year (based on Korean factories); we attribute this to the sustained upward trend in the prices of major commodities (eg natural rubber, butadiene).
Earnings performance to strengthen stocks and increase market consensus
– Strong earnings performance should support the stock. We believe that the increase in tire sales is the reason why the profits exceed the market consensus; 2Q21 revenue of KRW 1.8 billion (+ 32.4% year-on-year) exceeded the consensus of KRW 58.8 billion (3.4%). We believe the consensus will be increased to reflect increased unit tire sales and lower US anti-dumping tariffs.
Market conditions are eroding HoH due to rising commodity prices and slowing sales
– We see market conditions deteriorate in 2H21. Rising natural rubber / butadiene prices are expected to lead to higher raw material costs. On the other hand, the recovery in demand for tires is expected to slow. As such, it should become increasingly difficult to fully pass on rising raw material costs, which will put pressure on margins in the future.